Smart Tax Reform

Congress is seriously considering much needed tax reform. The features of reform that are being discussed in public are all good. However, the most important feature is a hot topic in Congress but isn’t being discussed in the public arena. That feature is shifting some of the tax burden off production and onto consumption. The public is no longer fooled by politicians who try to hide the true cost of government by taxing producers rather than consumers directly. Today most Americans understand that consumers ultimately pay all taxes.

Why is it so important to shift taxes directly onto consumption?

Foreign nations currently have an unfair advantage that makes it more expensive for American companies to export their goods because of how we collect taxes. “Free trade” has ushered in unrestricted, open access to American markets, with disastrous consequences. The results have been destroying our economic base, with businesses closed and U.S. jobs lost.

The World Trade Organization (WTO) allows consumption taxes collected on exports to be rebated to the producer, making the tax on exports zero. The common method for collecting consumption taxes is the Value-Added Tax (VAT). Of the 150 or so members of the Organization for Economic Cooperation and Development (OECD), only one nation does not have a VAT…. the United States. Using the VAT, foreign nations rebate taxes back to the producer on products for export and send VAT taxes on our imports are sent to their treasury. The US embeds a 23% tax burden in all American products.

This allows foreign nations the ability to adjust their taxes at the border and, in effect, tax imports while excluding taxes on exports making U.S. products 30-40% more expensive and therefore not competitive. Whatever we do with tax reform, we must address the border adjustability advantage our trading partners currently have over the US.

Another way to look at this is the effect on individual taxes by Americans. By giving the US the ability to border adjust our taxes, we expand the tax pool by including imports. In other words, we should tax other countries by taxing imports just as our trading partners currently do with our products. Our trading partners tax our products 17% on average via their VAT. If we implement a VAT or equivalent of 8.5% as Cruz, Cardin and Ryan propose, this will add over $300 billion in new revenue to our treasury annually. That will go a long way to providing tax cuts and balancing our trade and budget deficits.

Some might say this is just another form of tariffs and they would be right. The point is the rest of the world does this and by us not taxing imports, we lose jobs and manufacturing companies to our trading partners. When we negotiated tariff reduction with Mexico via NAFTA, both countries lowered the tariffs by about 15%. Mexico immediately enacted a VAT of 15%. The net effect of this was that we lowered tariffs/taxes on imports from Mexico by 15% and they didn’t. The same thing happened with Central American countries when we negotiated CAFTA. We lowered tariffs about 12% in all involved countries and they implemented a 12% VAT. Again, we lowered tariffs/taxes and Central American countries didn’t.

Putting American producers on a level playing field with the rest of the world is a prime factor in balancing our budgets and restoring America’s job creating ability. It will also pay for the Trump tax cuts and lower the tax burden on Americans by including foreign producers in our tax base.

Congress is debating several consumption-based tax plans. It isn’t important which plan they choose: the Cruz plan, the Cardin plan, the Ryan plan or any of several other plans as they all include a VAT or equivalent. What is imperative is that whatever plan emerges from the Ways and Means committee, it must include a shift from taxing production to taxing consumption, leveling the playing field for American workers and companies.

Since the US negotiated the flawed trade policies Trump refers to, America has lost 70,000 manufacturers and over 10 million manufacturing jobs. For every manufacturing job lost, another 3 or 4 support jobs go away as well.

I know this is a difficult subject, but I hope the reader now understands the impact and urgency of this. Remember this: how we collect taxes is even more important than the level of taxation. We need to support President-elect Trump in re-negotiating our trade policies and passing his tax reform which must include a VAT or equivalent.